Candidates show their true colors on taxes

What the candidates' tax proposals really tell us, and what it means for you

By

JenniferOpenshaw

NEW YORK (MarketWatch) -- As the economy becomes "ground zero" this presidential election, both candidates are lobbing tax proposals right and left.

It's worth a closer look to see what each candidate's plan means for you, and to see who the candidates are really trying to help. The nonpartisan Tax Policy Center gives us a handy analysis and summary. See their summary.

Here's the gist of each candidate's plan.

The Obama program

Barack Obama said he plans to keep most of the 2001-2003 tax cuts in place, except that he will return to two original top brackets and restore the 20% dividend and capital gains tax ceiling for top earners.

To that he adds a series of credits available to most working Americans, including the "Making Work Pay" credit worth $500 per person and a "Universal Mortgage Credit" ($500).

Some credits are expanded under Obama's plan, including the Saver's Credit ($500), Child and Dependent Care credit (up to $6,000), and an American Opportunity Credit ($4,000) modeled after the Hope college credit for education costs. These credits are targeted to those earning less than $250,000.

Obama also extends and indexes the "AMT patch" to ensure fewer middle-class taxpayers are caught by the AMT.

According to the Tax Policy Center estimate, Obama's overall tax plan will cost about $2.9 trillion in revenue over 10 years.

The McCain program

John McCain said he plans to keep all of the 2001-2003 tax cuts in place. Plus, he proposes expanding the personal exemption by $500 each year through 2016, a benefit to all taxpayers. His next target is AMT, where he proposes a permanent and substantial fix that would eventually bring the exclusion amount to $143,000 from today's $69,500 for married-filing-jointly filers.

McCain also proposes a series of tax breaks for business, including a reduction in the corporate tax rate and expanded breaks for investment. Finally, on the estate tax, he offers a $5 million exemption and a permanent 15% tax rate.

These proposals are projected to cost about $4.2 trillion over 10 years and are not limited to those making less than $250,000.

Recent proposals

But the most recent proposals aimed at dealing with the economic emergency shed more light on where each candidate really stands:

Obama recently proposed allowing emergency IRA/401(k) withdrawals of 15% of retirement funds, up to $10,000, without the usual 10% penalty.

McCain proposed to lower tax rates on retirement distributions to 10% for the first $50,000 withdrawn. He also proposed temporarily suspending required minimum distributions on retirement accounts to avoid forced selling during a down market. He also suggested eliminating taxes on unemployment benefits, and reducing maximum capital gains taxes to 7.5% for two years.

Now, Obama's retirement withdrawal plan seems to help everyone. Withdrawing retirement funds is bad for long-term financial security, but the $10,000 limit keeps it in check.

What about McCain's agenda? Cutting taxes on retirement distributions is a red herring. Why? Because the average senior, after taking exemptions, deductions for medical expenses, and other tax breaks, often falls into a low tax bracket anyway. McCain's proposal helps only wealthier retirees.

And those in a real financial bind won't pay much tax on unemployment benefits, either -- that break really helps those with high earnings, not the average unemployed person in financial distress. And capital gains? We all know who that helps the most, especially when most are suffering capital losses these days.

See a pattern here? I do. It seems the McCain program is designed to gain headlines and to appear to help everyone, but it really doesn't. It helps the "average Joes" who already make a lot of money.

Jennifer Openshaw is co-founder and president of the soon-to-launch WeSeed, a new approach to demystifying the stock market for everyday people, and author of "The Millionaire Zone." You can reach her at jopenshaw@themillionairezone.com.

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